Globus Medical, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited results compared with Q1 2013. Globus designs and sells musculoskeletal implants, primarily for spine procedures.
Financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Sales | $114.2 million | $105.0 million | +8.8% |
| Gross profit / margin | $88.9 million / 77.8% | $81.5 million / 77.6% | Margin +0.2 percentage points |
| Operating income / margin | $32.2 million / 28.2% | $29.2 million / 27.8% | Income +10.3% |
| Net income | $21.1 million | $19.9 million | +6.3% |
| Diluted EPS | $0.22 | $0.21 | +4.8% |
| Operating cash flow | $29.2 million | $18.3 million | +$11.0 million |
| Capital expenditures | $6.2 million | $6.8 million | |
| Free cash flow (company-defined) | $23.1 million | $11.5 million |
Cost of goods sold was 22.2% of sales versus 22.4%. R&D was $7.4 million (6.5% of sales), and SG&A was $46.7 million (40.9% of sales, down from 43.2%). The effective tax rate rose to 34.9% from 32.6%, partly reflecting the prior-year research-credit benefit.
At March 31, cash and cash equivalents were $104.6 million; marketable securities totaled $200.4 million; and working capital was $388.4 million. Total cash, equivalents and securities were $305.0 million. The company had no revolving-facility borrowings and $50.0 million of availability under its facility. Total liabilities were $97.4 million; acquisition-related liabilities were reported, but the filing does not identify other outstanding debt.
Changes and operating trends
- U.S. sales increased 5.6% to $101.7 million; international sales rose 43.0% to $12.5 million, representing about 11% of sales.
- Innovative Fusion sales grew 8.9% to $66.8 million; Disruptive Technology sales grew 8.6% to $47.4 million. Management attributed growth to new and legacy products, sales-force productivity, international market penetration and expansion.
- Operating cash flow improved, including from lower receivables and inventory cash outflows versus the prior-year quarter. Investing cash use fell substantially year over year, principally because of lower net purchases of marketable securities.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said existing cash, operating cash flows and the fully available credit facility were expected to meet liquidity needs for the foreseeable future. It expects continued investment in surgical sets, R&D, sales-force expansion and international markets, and noted additional liquidity could be needed as the strategy proceeds.
- Litigation provision was $2.5 million versus $0.05 million a year earlier, primarily reflecting a $2.0 million Altus settlement and interest related to the DePuy Synthes case. The company also reported a $16.0 million jury award in the DePuy Synthes matter and a $4.3 million Bianco jury verdict accrued in 2013; it is challenging both outcomes. The ultimate outcomes of several other cases could not be determined, and the company warned litigation costs could materially affect earnings, financial position or cash flows.
- Management cited possible liquidity pressures from lower product sales, reimbursement changes, pricing competition, cost increases, regulatory changes and unfavorable litigation outcomes. The revolving facility matures in May 2015 and includes restrictive covenants; the company reported covenant compliance.
- Adjusted EBITDA was $42.1 million versus $35.5 million, and adjusted diluted EPS excluding litigation was $0.24 versus $0.21. These are company-defined non-GAAP measures and should not be treated as substitutes for GAAP results.
Key facts for investors to verify
- Progress and any additional costs or remedies in the DePuy Synthes, Bianco and other disclosed litigation, including effects on product sales or injunctions.
- Whether international growth and recent product launches continue, and whether sales-force expansion supports growth without eroding margins.
- Cash conversion, inventory levels, capital needs and the availability and terms of financing beyond the May 2015 credit-facility maturity.
- Changes to the research and experimentation tax credit and the resulting effective tax rate.